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Analysts Mixed Over Whether Gold Will Rally In Looming U.S. Government Shutdown

By Kitco News
Monday September 30, 2013 12:12 PM

(Kitco News) - A looming partial U.S. government shutdown seems more likely as the House of Representatives and the Senate are unable to come to an agreement about the U.S. budget, but analysts have mixed opinions on whether it will affect gold prices.

“While a smaller one-week continuing resolution is increasingly possible, with little time to hammer out a compromise before the midnight deadline, the odds of a government shutdown have increased substantially,” said Gennadiy Goldberg, U.S. strategist at TD Securities. “While the economic impact of a shutdown may not be crippling to U.S. growth, the hit to consumer and business confidence from such an outcome could be substantial, increasing the shutdown’s effects.”

The U.S. fiscal year ends at midnight EDT on Monday, and Democrats and Republicans in Congress are fighting over funding for the next fiscal year. If the two sides cannot come to an agreement, non-essential parts of the U.S. government will be closed.

The U.S. government has been shut down before, with the longest occurring from Dec. 16, 1995 to Jan. 6, 1996. Looking at a price chart, from Dec. 15, 1995 to Jan. 10, 1996, gold prices went from about $386 to $396.

During the closure, equities took a modest hit. S&P 500 index futures slid from 617 points to 598 points. However, after the closure, S&P 500 futures saw a significant rally and hit 638 points by Feb. 1, 1996.

As of 12:12 p.m. EDT, spot gold was at $1,331.20 an ounce, down $5.00, or 0.37% on the day. At the same time S&P 500 futures were trading at 1,683.67, down 8.08 points, or 0.48% on the day.

While gold prices rose during the government closure, analysts are mixed as to what could happen to the precious metal in the current environment.

Janet Mirasola, managing director of metals for RJ O’Brien, said in a report Monday that gold could benefit as a “port of safe haven amidst global assets.”

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, said traders are selling to raise cash as threats against the economic recovery continue to grow.

“Gold buyers are on the sidelines in a wait-and-see attitude prevailing as (a government) shutdown in 15 hours looms. Deadlines in Washington about raising the debt ceiling are again reminding people of … past instances when raising cash was important,” he said.

Bill Baruch, senior market strategist with iiTrader, said the “fear trade” is helping to support gold above $1,300 an but there are not many other factors that will help push the price higher in the near-term.

He added that expects to people will move into cash, taking a wait-and-see approach, but the market is expecting to see this problem be resolved.

“There is not a lot of value seen at levels of $1,400 and that is why the market is staying in check at these major levels,” he said. “You are starting to see the equities come off the lows and the bonds come off the highs what this is saying is the market is pricing in that this deal is going to get done,” he said.

On Sunday, the House of Representatives passed legislation to keep the federal government open, which also includes a one-year delay for the Affordable Care Act. The U.S. Senate won’t reconvene until 2 p.m. EDT Monday, and they are expected to once again strip the legislation of any reference to the health care law.

By Neils Christensen of Kitco News nchristensen@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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